Everything you need to know about buying off plan - Part 1: The benefits
Welcome to the first installment of our 3 part series that will answer the common questions we are asked about buying a new property off the plan. Today we’ll focus on the benefits you can experience from this type of purchase. Then, in the next 2 installments, we’ll cover how to find the right property and the purchasing experience and process.
If you’re not familiar with the term ‘buying off plan’, it simply refers to the purchase of a property that hasn’t been built yet. While this type of opportunity has been around for many years, it is not the most common way of buying real estate and as a result many people may not have purchased property in this way, so let’s look at what’s involved.
Let’s start with some of the advantages that apply to all buyers:
1. Is there a price benefit?
There may well be, but every purchase should be assessed on its own merits. It stands to reason that a developer seeking pre-sales in a new project will understand the need to price competitively due to the requirement to achieve a higher volume of sales at the initial launch and this can certainly work in your favour.
The question you should ask yourself is simple – “Is this good value?” If it is and you have the opportunity to get in prior to advertising in a well-designed and well-located development, that can also create financial benefits.
One of the real benefits however can be time. In a balanced market, you’d typically expect prices to trend upwards during an 18 month to 3 year construction cycle, so you could find that by the time your property is completed, it will be worth more than you are paying for it.
It’s important to be aware though, that markets are cyclical, and while property values have steadily increased over the long term, with average property prices doubling every 10 or so years, there are still short term fluctuations where the market goes up and the market goes down.
Depending on where you are in the cycle, there is a small risk, however unlikely, that your apartment might be worth slightly less than you are paying for it when it comes time for you to settle.
2. Is your money safe?
You might have seen one of those current affair show segments on dodgy builders running off with buyers’ money without completing the building. Well, that can’t happen in the ACT. When you buy an apartment or townhouse off plan, your deposit money is held in a trust account which the developer can’t access until the building is completed (according to the plans you agreed on) and contracts have been settled.
It is very important that you get the appropriate advice before entering into a contract and we will discuss this in a later installment.
3. What if there are any concerns or defects when the building is complete?
If you buy off plan from a reputable developer, any defects are likely to be minor.
However, to ensure a positive experience, the developer will facilitate a number of safeguards once the final certificates have been issued.
A pre-settlement inspection will be arranged where you and/ or your advisors can meet the developer’s representative at the property. At this time it is likely the developer will have identified a number of items that will be agreed for rectification prior to settlement and you have the opportunity to inspect room by room to see if there are any more you can detect. This is also a great opportunity to ensure what is identified in the detailed inclusions list (which forms part of your agreement to purchase) has been provided.
You are also covered by a 90 day maintenance period in which the builder or developer must correct any building faults, and this is in addition to manufacturer’s warranty on the appliances that have been installed. You do not get this kind of protection when you buy an established property.
Does buying off plan offer specific advantages to First Home Buyers?
1. First Home Buyer Incentives
In the ACT, eligible first home buyers can receive a number of incentives when they purchase a new home (which includes any off plan purchases).You might be eligible for substantial stamp duty reductions as well as stamp duty deferrals. If your new apartment is valued at $442,500 or less, you will only have to pay a stamp duty of $20, which is a significant saving.
2. Buying off plan gives you time.
When you purchase a block of land and arrange for someone to build you a house, you need to make progress payments. That doesn’t happen when you buy off plan. You pay an initial deposit, but then you don’t have to pay the remainder of the purchase price until the property is completed. This gives you extra time to save, plan and get your finances sorted.
One thing to consider though, is how your circumstances might change in this time. If you’re buying with your partner and then you break up, or you have to move for work, or lose your job, it can potentially put you in a challenging situation.
Of course, these are the same risks you would need to consider if you are thinking of buying an established property.
Are there attractive benefits for Investors?
1. Depreciation on your new property can be claimed as a tax concession.
You can claim depreciation on any investment property that earns you an assesable income. However, tax deductions for depreciation are considerably higher for brand new properties and this can significantly reduce the after tax cost of owning and operating an investment property.
2. Stamp duty can be claimed as a tax concession.
In the ACT, being able to claim any stamp duty you paid on your new off plan purchase as a tax concession can save you a significant amount of money. To maximise any benefits you might receive you should speak with a tax specialist.
3. Attractive rental returns and low maintenance.
Buying an off plan apartment or townhouse is usually more affordable than purchasing a house. They are also more likely to attract higher rental returns and have lower maintenance costs.
As you can see, there can be a number of significant benefits to buying off plan. Check out the 2nd part of this series, where we will look at how to find the right off plan property for you.
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